Look — The Plan! The Plan!
Posted @ 10:16 pm - Filed under 1031 Exchanges, Financial Planning, Real Estate Investing, Purposeful Planning
You would like to quit your day job and retire on the cash flow from the many rental properties you own. You have a problem though because the income just isn’t quite high enough yet, and probably won’t be for a few years. Yet you want to retire because you have so many other things you want to experience and accomplish. Is there a solution out there that might make it possible to move up that retirement party? The answer for some is depreciation. Say What?
Let’s take an example out of my own client files. The Millers have been clients for several years having come to me with only their home and less than $100k in cash. To make a long story short, in a few years they’d parlayed a strong market, the ability to take action, strong wills, solid FICO scores, and decent five figure incomes into enough sheltered income for Missie to quit her job. She was 37 and Scott was 40. They had three kids. Their Plan, which they executed to near perfection was to buy property using leverage wisely, trade when the market said it was time, and keep doing so until she was in her mid-40’s. At that point the conversion to a cash flow emphasis would make a very comfortable retirement possible.
Since they’d been so focused during the beginning years in acquiring as much property as possible, they had also accumulated an impressive amount of annual depreciation. As a matter of fact, through the use of well timed tax deferred exchanges combined with prudent use of leverage, and pulling the trigger when their Purposeful Plan called for it, they found themselves with about $200k of depreciation!
They told me they’d changed their minds about working until Missie was 45ish or so. She wanted to be a stay-at-home mom. A modification of strategy was necessary. With only Scott working now and their job income just below $45k, they had a ton of unused depreciation. Most of that depreciation remained available because in anticipation of Missie staying at home now we’d arranged for some of the properties to be refinanced for a higher cash reserve. This resulted in these properties yielding much less cash flow. This was fine with them because they liked my Plan modification which would generate more non-taxable income while maintaining the growth position.
Here’s what we did.
We simply chose a property or two we knew would yield about $100k in net equity if sold. The unused depreciation would offset any capital gain. Now they had cash reserves, Scott’s income, plus another totally tax sheltered $100k. They took one look at that picture and Scott quit his job too. Now we sell a property or two a year, (not a problem) they don’t pay taxes, and they’re both home with their kids. Their portfolio is still growing at a magnificent rate, and the Plan calls for them, in 2007 to trade some of their Phoenix properties into either Boise or Ogden. In fact they were listed just the other day.
Don’t you love it when a Plan comes together?
This entry was posted on Thursday, January 4th, 2007 at 10:16 pm and is filed under 1031 Exchanges, Financial Planning, Real Estate Investing, Purposeful Planning. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
